Acknowledgement of Conflict Insufficient to Support Claim for Disgorgement of Fees

In a Decision and Order, dated December 8, 2022, in Marcum LLP v. L’Abbate, Balkan, Colavita & Contini, L.L.P., Index No. 151586/2021, Justice Joel Cohen of the New York County Commercial Division, among other things, dismissed plaintiff’s claim to recover legal fees paid in connection with allegedly negligent work but not plaintiff’s claim for compensation for its increased legal expenses arising out of defendant law firm’s late withdrawal as counsel. The Court explained:

Plaintiff seeks disgorgement of legal fees on the ground that L'Abbate purportedly operated under a conflict of interest, was incompetent, and was disloyal, citing to Baugher v Cullen and Dykman, LLP (173 AD3d 959, 961, 103 N.Y.S.3d 136 [2d Dept 2019]). In that case, the court held that "[a] cause of action for forfeiture of legal fees based on an attorney's discharge for cause due to ethical violations may be maintained independent of a cause of action alleging legal malpractice or breach of fiduciary duty, and does not require proof or allegations of damages" (see also Ulico Cas. Co. v Wilson, Elser, Moskowitz, Edelman & Dicker, 56 AD3d 1, 13, 865 N.Y.S.2d 14 [1st Dept 2008] [noting that where there were factual issues as to whether attorney had operated under a conflict of interest, the issue of whether the attorney should be required to disgorge the compensation received during the period of alleged disloyalty would be properly entertained on a full record after trial]).

Here, Plaintiff does not allege disgorgement as an independent cause of action. Moreover, L'Abbate was not discharged for cause from representing Marcum. The FAC only claims that when L'Abbate placed its insurance carrier on notice of the sanctions motion, this "effectively discharge[d] L'Abbate for cause" (FAC ¶ 85) (emphasis added). In fact, L'Abbate moved to be relieved as Marcum's counsel due to the potential conflict and the motion was not decided because the Litigation settled two days after it was filed (see Conway v Marcum & Kliegman, LLP, et al, NY County (Index No. 652236/2014), Dkt Nos. 605, 611, 617).

Furthermore, there was no finding in the underlying Litigation that L'Abbate violated any disciplinary rule, and the sanctions motion was never heard due to the settlement. The fact that L'Abbate acknowledged a conflict of interest as the reason for withdrawal does not indicate that there was a violation, only the existence of a potential claim. Finally, L'Abbate has submitted unrebutted evidence that it did not charge legal fees for any work associated with the Sanctions Motion, the Clawback Motion, or the Withdrawal Motion, and thus neither Marcum nor its insurers incurred these costs (NYSCEF 60 [Rice Affidavit, ¶7, ¶9, ¶13]). Accordingly, the claim for disgorgement is dismissed.

Turning to the Legal Fees claim, Plaintiff seeks damages for the additional attorneys' fees paid to Hodgson Russ (who had already been retained as co-counsel) to prepare to first-chair the trial of the Litigation after L'Abbate's withdrawal as counsel, and attorney's fees incurred by having to retain outside coverage

counsel at the law firm of Reed Smith LLP to represent Marcum in a coverage dispute with its insurers. However, according to Defendants, under Marcum's primary insurance policy, Marcum was responsible for the first $2 Million in loss amounts, which are defined to include defense costs, inclusive of L'Abbate's legal fees, and settlements (see NYSCEF 8). Defendants contend that any excess legal costs incurred as a result of the matters alleged in the Complaint were borne by Marcum's insurers, not Marcum itself. Marcum disputes factual predicate of Defendants' argument. This is not an issue that can be resolved on a motion to dismiss. Thus, the motion to dismiss the Legal Fees branch of the Excess Fee Claim is denied. The issue, including the applicability of the collateral source rule, can be addressed on a more complete factual record on summary judgment or at trial.

The attorneys at Schlam Stone & Dolan frequently litigate claims relating to payment of attorney fees and malpractice. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding these issues.